RBI Monetary Policy Review
The Monetary Policy Committee voted unanimously to keep Reserve Bank of India’s key lending rate – the repo – unchanged at 4% while voting 5 to 1 majority to continue with the ‘accommodative’ stance as long as necessary to revive growth till the impact of Omicron on the economy is mitigated.
Following are the key highlights of the central bank’s February 2021 Monetary Policy Statement unveiled by Governor Shaktikanta Das.
POLICY ACTION:
• MPC vote unanimously to keep repo rate unchanged at 4%
• MPC voted 5 to 1 majority to continue with accommodative stance as long as necessary to revive and sustain on a durable basis and continue to mitigate the impact of COVID-19 on the economy
• Reverse repo rate stands at 3.35%; MSF and Bank rate at 4.25%
• Financial market volatility and geo-political tensions are adding layers of ambivalence to the outlook
• Improving inflation outlook, uncertainties related to Omicron and global spillover, continued policy support is warranted for a durable and broad-based recovery
• Balance sheet of SCBs are relatively stronger with higher capital adequacy, reduced NPA, higher provisioning cover and improved profitability vs previous year.
• the policy actions of the RBI have yielded the desired results in a smooth and orderly manner
• The minutes of the MPC’s meeting will be published on Feb 24, 2022.
• The next meeting of the MPC is scheduled during Apr 6 to 8, 2022
GROWTH:
• Private consumption, the mainstay of domestic demand, continues to trail its pre-pandemic level
• Govt push on capex and exports to enhance productive capacity, strengthen aggregate demand; Will crowd in private investment
• Prospect for agriculture have brightened on good progress of winter crop sowing
• Some loss of the momentum of near-term growth while global factors are turning adverse, but domestic growth drivers are gradually improving
• Real GDP growth projection at 7.8% in 2022-23 consisting of 17.2% in Q1 unchanged from December policy, while lowering the growth projection for Q2 to 7.0% from 7.8% projected in the December policy. For the Q3 the GDP is projected at 4.3% and 4.5% for Q4 FY23
INFLATION:
• CPI inflation trajectory has moved in close alignment with RBI projections.
• Food prices are shoftening due to strong supply side intervention by the government and increase in domestic production
• Hardening of crude oil prices presents a major upside risk to inflation outlook
• Core inflation remains elevated at tolerance testing levels
• Inflation projection for 2021-22 is retained at 5.3%, with Q4 at 5.7% on account of unfavourable base effects that ease subsequently.
• Jan CPI to move closer to the upper tolerance band due to base effect
• CPI inflation for 2022-23 is projected at 4.5% with Q1:2022-23 at 4.9%; Q2 at 5.0%; Q3 at 4.0%; and Q4 at 4.2%, with risks broadly balanced..
LIQUIDITY:
• The Reserve Bank slew of liquidity measures have helped bring down borrowing costs
• RBI has turned to rebalancing liquidity on a dynamic basis while maintaining adequate liquidity support
• Rebalancing involves twosided operations: first, rebalancing liquidity from the overnight fixed rate reverse repo towards the 14-day variable rate reverse repo (VRRR) auction as the main operation, supported by fine-tuning auctions of varying tenors as envisaged in the Revised Liquidity Management Framework of February 2020
• Secondly conducting repo auctions of 1-3 day maturities to meet transient liquidity mismatches and shortages, as for instance in the recent case of more than expected GST outflows during the third week of January 2022
• Four decision taken to restor the revised liquidity management framework
• First, variable rate repo operations of varying tenors will henceforth
• be conducted as and when warranted by the evolving liquidity and financial conditions within the cash reserve ratio (CRR) maintenance cycle.
• Variable rate repos (VRRs) and variable rate reverse repos (VRRRs) of 14-day tenor will operate as the main liquidity management tool.
• These main operations will be supported by fine-tuning operations to tide over any unanticipated liquidity changes during the reserve maintenance period. Auctions of longer maturity will also be conducted as warranted.
• From March 1, 2022, the Fixed Rate Reverse Repo and the MSF operations will be available only during 17.30-23.59 hours on all days and not during 09.00-23.59 hours
ADDITIONAL MEASURES:
• Extension of term liquidity facility of Rs 50,000 crore to emergency health services till Jun 30, 2022.
• Extension of on-tap liquidity window of Rs 15,000 cror for contact-intensive sector till Jun 30, 2022
• Hikes limit of Voluntary Retention Route for investment in G-sec, corp debt by FPIs to Rs 2.5 lakh crore from Apr 1, 2022
• Review of Credit Default Swaps guidelines
• To allow banks to deal in offshore foreign currency settled rupee derivatives market.
• Enhances the cap under e-RUPI to Rs 1 lakh per voucher and allow use of the e-RUPI voucher multiple times